Mutual Fund Scandals: More Fallout

In the opinion of New York State attorney general Eliot Spitzer, Pilgrim Baxter & Associates can claim the title of Most Egregiously Corrupt among the growing list of mutual funds under investigation. "Here you had the founders themselves manipulating the system," Spitzer told TIME. "There's an extra level of insidiousness to it." Complaints filed last week by Spitzer and the Securities and Exchange Commission charged Gary Pilgrim and Harold Baxter with civil fraud. They are accused of allowing an outside hedge fund (in which Pilgrim held a major stake) to make rapid trades in Pilgrim Baxter funds, a practice forbidden by the company. Baxter is also accused of giving details about the firm's holdings to a friend, a broker whose clients traded on the information. Asked if the allegation could lead to insider-trading charges, Spitzer said, "It's an issue that has to be worked through." An attorney for the two men declined to comment.

Pilgrim Baxter quickly distanced itself from its founders, who resigned Nov. 13. "The way things were done is not the way they'll be done in the future," says new CEO David Bullock. He claims that an internal review has so far turned up no other issues, and that investors have not left the $7 billion fund in significant numbers. Still, the firm will have to contend with its eponyms' dubious legacy: Spitzer is demanding that it return $250 million in fees to investors, a potentially crippling penalty.